July 21, 2012

The Federal Budget Explained

David Wessel of the Wall Street Journal does a very good job of explaining the federal government's budget and how it has changed over the past fifty years. This is an excerpt of his forthcoming book.

Some highlights:

In 2021, if current policies remain in place, government spending on health care will consume 33%, according to the Congressional Budget Office, even if the Affordable Care Act survives Republican attacks. The Medicare prescription-drug benefit alone will cost the government more over time than the wars in Afghanistan and Iraq. The war spending will end someday; the drug benefit is permanent.

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The CBO estimates that for families in the very middle of the middle class, the federal government took an average of 19.2% of their income before deductions in 1981 in income, payroll and all other federal taxes. State and local taxes have risen for many, but the federal tax bite has eased. In 2007, just before the recession hit, the CBO estimates that the tax take for Americans was 14.3%—and it has fallen since to 12.4% in 2011, according to the nonpartisan Tax Policy Center. Nearly half of American households—46%—didn't pay any federal income taxes at all in 2011. The vast majority of them didn't make enough money to owe taxes, or they took advantage of tax breaks that Congress has created.

A democracy cannot persist if half (or nearly half) the population can vote to increase spending but is not required to contribute to its cost.

The following graphic shows the change in government revenues and expenditures through time.

Finally, this

A lot of what government does is siphoning money from some and giving it to others, or occasionally to the same people. About $2.3 trillion, two-thirds of all federal spending last year, went to benefits of some sort for individuals: Social Security, Medicare, Medicaid, food stamps.

As long as government gives itself the legal authority to forcibly take money from one person to give to another, we should not be surprised to see the burgeoning rent-seeking industry we have today. When people argue and complain that there is too much money in politics, they need to redirect their complaint and say that there is too much politics in spending. Nothing will change on that front as long as we the people deem it appropriate for self-interested politicians and bureaucrats to determine the allocation of wealth and income in this country.